Why the Price Game is a Losing Strategy, But Discernable Value is Everything
Why the Price Game is a Losing Strategy, But Discernable Value is Everything
A Blog Post by Sean Reyes, Chief Marketing Officer for Recall Masters
The market feels unsettled, but the US economy has yet to convincingly shift into a recessionary cycle. That’s not to suggest that the average consumer doesn’t feel the impact of high inflation, shrinking personal savings, skyrocketing debt and crippling interest rates for loans. Dealers clearly feel the brunt of a tightening economy, especially as it relates to new vehicle pricing, loan approvals and consumer debt-to-income ratios. There’s no disguising it – we’re all feeling it, though consumer spending has been rather stable. That’s about to change, as US consumers have stretched their finances to the breaking point and have no other choice but to curtail spending. The tremors could force dealership service departments to audit pricing or face further defection and service declines.
Global economic indicators that the US economy is next in line. In New Zealand, consumers are giving up spending at a rate that surpasses the downturn of the global financial crisis (GFC), and is close to passing that of the 1980s market crash, as well as the tough times of the 1970s. Spending was down 2.3% compared to the same month last year, despite population growth. In the UK, British consumers reined in spending, driving a 0.6% year-on-year drop in card spending last month, the first decline since the depths of the Covid lockdown in early 2021. Separate figures from the British Retail Consortium and and KPMG showed total retail sales fell 0.2% in June — a reversal of fortunes from an annual gain of 4.9% a year ago. Japanese household spending fell by 1.8% in May compared to a year earlier, contradicting forecasts of a slight gain. Economists predict a pullback in Australian consumer spending could last years. And now the gray cloud is hovering menacingly over the US.
‘Bond King’ Bill Gross predicts American consumers will run out of cash later this year, paving the way for a prolonged recession. If we haven’t felt the full force of a down economy yet, the smoke signals in the distance suggest there’s no escaping the repercussions of poor fiscal and monetary policy. Government spending hasn’t slowed and increasing tax rates are slowing job and wage growth. Since the pandemic, we’ve been waiting for this moment and only put it off by printing money, actions that triggered high inflation and out-of-control spending. Rather than allowing market forces to make corrections, the economy has been propped up on stilts that were only destined to collapse.
Belts are tightening just when the economy needs a spending boost. This signals trouble for a nation grappling with higher prices that erode purchasing power. The dip in spending is a red flag for dealerships hoping to grow customer pay (CP) service revenue from older out-of-warranty vehicles. The average age of a vehicle on the road today is 12.8 years, seemingly a gold mine for dealers. While dealerships have enjoyed the top spot in terms of the consumer’s desired location for service, aftermarket, independently-operated retail shops recently took the crown. And, with a recession at our doorstep, consumers will be scrutinizing every purchase.
In 2023, dealerships accounted for 30% of all service visits in the U.S., a significant drop from the 35% they held in 2021. Vehicle owners genuinely acknowledge that dealerships deliver a more “reliable” servicing experience – factory-trained technicians, factory parts, fewer bring-back episodes and the ability to repair dangerous open recalls. If money were no object, dealerships win hands-down. But where is it that general repair shops are gaining ground? Look no further than location, prior experience, cost, convenience, and the genuine rapport between customers and staff. Independent shops have effortlessly outpaced dealerships and now, dealerships have a real dogfight on their hands. How do dealers combat this?
For a few years now, dealers have been leveraging “transparency” to win over consumer trust. If vehicle owners could observe the service advisor’s recommendations, there’s a higher likelihood that the consumer will approve the recommended work. There’s no flaws to that approach other than it doesn’t necessarily address the current economic conditions the average consumer now faces – access to capital. Let’s take the need for tires as an example. Cars need tires – it’s not optional. Yet, dealerships only sell about 8% of all replacement tires. Clearly, there’s a disconnect with the buying public. They buy 100% of the new cars, but only a fraction of the replacement tires. You might say tires are the first point of defection, as fixed operations leader Mike Vogel would suggest. He’s right, but those numbers are growing at a slow rate even as dealers get more competitive with a tire offering. Why is that? Because dealerships are still swimming upstream when it comes to the perception that dealers can’t offer expedient service and competitive pricing on tires. Vehicle owners aren’t going to the dealership to buy tires, the need for tires happens secondarily to the primary reason for the service visit. As such, consumers pull back on a tire investment and decide to shop it out. And, once they shop it out with other independent shops, it is a “discernable” value, like price, and not “perceived” value that wins out.
Isn’t “perceived” value better connected to the customer than “discernable” value? In other words, if every customer is unique, why deny the customer access to a value that they personally find more appealing than one confined to the limits of being “discernable”? The perception of value, no doubt, is important. However, emersed in economic conditions that limit values that could be described as a luxury, consumers default to price. Every single day, companies are winning over consumers on price, which is especially true in a recession. The problem with price as a differentiator is that it’s transactional rather than based on ongoing loyalty. Those customers that select price over other values are not only disloyal to providers thereafter, but they are largely disappointed with the transaction. After all, you get what you pay for, right? By leading with “discernable” value, we can clearly define the values in hard terms that leave no interpretation or “perception” over what the consumer receives in exchange. But price isn’t the only “discernable” value. Dealers need to define alternative differentiators to offset price, because building a customer base won over by price is a house of cards on a windy day.
The most obvious type of “discernable” value is price. That’s an easy comparison for the average consumer to make, but it doesn’t tell the whole story that encompasses a servicing experience. While dealerships need to remain competitive on pricing – say, within 20 points of an aftermarket provider – they’ll need to also focus on other important attributes that differentiate from independent shops. This is where mobile service, pick up and drop off, checking and repairing recalls, prompt service, expedient communication and other policies that reinforce why a consumers should embrace paying more for servicing at the dealer.
Does your dealership sell tires? If it does, do your employees buy them from you? Why or why not? If you can’t convince your own team to buy tires with your store, then you need to understand why. Given the economic outlook, dealerships need to do a better job with shopping the competition and understanding where the leak is. It’s not going away, not any time soon. There are consumers who value convenience over price. They value trust trust, quality of work, personalized service and communication that consumers crave the most. But these are values really hard to differentiate as clearly as price, but that’s what dealers will need to do. Today’s busy consumer is going to value convenience and price. They may be willing to overlook marginally higher pricing, but the tougher the economy gets, the harder it will be to win them over. Here’s the hard truth – consumers aren’t willing to pay more and not clearly observe they justification for paying more. Call it the “discernable” value.
As wallets are pinched ever tighter, we’re in a battle to win the consumer while reducing escalating customer acquisition costs. Pay attention to pricing, but clearly demonstrate the other variables that also shape the customer experience and solidify ongoing loyalty. This is how you win long term retention game and accentuate the key differentiators that are unique to your dealership. Avoid describing service as a transaction, but rather envelope service as essential piece of the customer portfolio. We’re in the people business. We just happen to sell and service vehicles.
About the Author
|
|
Sean Reyes oversees all marketing efforts at Recall Masters as Chief Marketing Officer. Sean also serves as the host of the FixedOps UX, a “minicast” that revolves around the fixed operations ecosystem and the tactics that build a better user experience for customers, dealership staff and other stakeholders. Sean’s experience spans more than 35 years of business development and strategic marketing experience, having developed go-to-market products and solutions for the automotive, healthcare, insurance, finance and technology industries to serve Fortune 1000 clients like American Express, Toshiba, Western Digital, Cox Communications, Novartis, Microsoft, IBM, Compaq, HP, National General Insurance, MyCustomer Data, DigniFi and several automotive affiliates and dealerships. Sean lives in Napa, CA with his wife Kathryn and spends his free time hiking, kayaking, playing guitar, going to concerts, rebuilding project cars and helping his kids embark on adulthood. |
